dt52861172 lgLast month we started answering important questions such as these:

  • What is your company worth?
  • What determines how much you get?
  • What influences how fast it sells?

We will continue to examine the factors that go toward answering these questions, starting with:

Customer Relationships

When your customers think of your business, what do they think of? Is it your products; your service or a person at the company? When they buy from you, do they buy because you have better pricing, product breadth, or because they like Mary their account rep?

Buyers worry that the relationships your customers have with the business are really a relationship between Frank in your customer’s purchasing department and Sarah in customer support.

If there is a change – if Sarah leaves when the owner does, some of the customers may leave too. This doesn’t happen immediately – Sarah is not that important. It happens over time as the customer begins to feel differently, loyalty ebbs, and the relationship becomes ripe for being poached by a competitor. [quotes]This is especially true when the customer relationship is with you, the owner.[/quotes] That relationship is definitely going to change the day you sell and walk out the door.

[quotesright]Business owners considering a sale should work on making sure that each customer has contact with multiple people in the business,[/quotesright] preferably not all members of the owner’s family. While having a primary contact has value, having your customer familiar with many of the team members lessens the importance of one of them leaving the business.

This multi-contact approach also forces each member of the team to be more diligent in recording notes, transactions, order and contact data in the corporate records, which also has value to the buyers.

Family Members

123rf43055480 lg[quotes]Perhaps no single topic is more complex than that of family members working within a business.[/quotes] Everyone has a story about a family business paralyzed by family dynamics. While there are some successes, the general feeling among buyers is a fear of businesses with too many family members in key positions, especially: Sales, Customer Service, and Accounting. Each of these positions deals with the customer and money. [quotesright]These positions can be difficult to replace at the same time as a working owner. [/quotesright]

For a well-functioning family, there is a great sense of satisfaction and trust as the business is built and new members of the family are brought in to utilize their skills for the betterment of the enterprise. If you have known someone their whole life, it is natural to trust them above an outsider. However, a buyer may worry that if family members stay on, their loyalty may not transfer to new ownership.

Here are some examples of family members in spots that will scare away buyers:

  • Family members head the finance, operations, sales, and product development functions. [quotesright]The more these functions are run by family members, the more challenging the situation becomes for a third-party buyer. [/quotesright] The idea of replacing so many key positions during a transaction is daunting.
  • A family member has long been the top salesperson in the firm and now in a sales management capacity, actively manages most of the top customer relationships. Identify a secondary contact for the top customers as part of the development of new salespeople.

It is incumbent upon the business owner to think like a buyer when considering how to position family members in the period leading up to a sale. [quotes]The objective buyer doesn’t care what a key employee’s last name is,[/quotes] only what their capability and desire is to help the business succeed. If a family member is not the best long-term candidate for a key position, the business owner needs to replace that individual and hire stronger talent. The emphasis on long term implies that key employee will stay with the business well after the transaction.

Personnel decisions are never easy to execute and making tough decisions about family members is even more challenging, yet these decisions are vital for properly positioning the business for sale to a third party.

Coming next month: “Financial Ratios and Product and Industry Concentrations”

-         by Greg DeSimone - Beacon Equity Advisors, Inc.

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